[Federal Register Volume 81, Number 185 (Friday, September 23, 2016)]
[Rules and Regulations]
[Pages 65542-65545]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-22901]


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PENSION BENEFIT GUARANTY CORPORATION

29 CFR Part 4007

RIN 1212-AB32


Payment of Premiums; Late Payment Penalty Relief

AGENCY: Pension Benefit Guaranty Corporation.

ACTION: Final rule.

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SUMMARY: The Pension Benefit Guaranty Corporation (PBGC) is lowering 
the rates of penalty charged for late payment of premiums by all plans, 
and providing a waiver of most of the penalty for plans with a 
demonstrated commitment to premium compliance.

DATES: Effective date: This rule is effective on October 24, 2016.
    Applicability date: The changes made by this rule apply to late 
premium payments for plan years beginning after 2015.

FOR FURTHER INFORMATION CONTACT: Deborah C. Murphy, Assistant General 
Counsel for Regulatory Affairs ([email protected]), Office of the 
General Counsel, Pension Benefit Guaranty Corporation, 1200 K Street 
NW., Washington DC 20005-4026; 202-326-4400 extension 3451. (TTY and 
TDD users may call the Federal relay service toll-free at 800-877-8339 
and ask to be connected to 202-326-4400 extension 3451.)

SUPPLEMENTARY INFORMATION:

Executive Summary

Purpose of the Regulatory Action

    This final rule is needed to reduce the financial burden of PBGC's 
late premium penalties. The rulemaking reduces penalty rates for all 
plans and waives most of the penalty for plans that meet a standard for 
good compliance with premium requirements.
    PBGC's legal authority for this action comes from section 
4002(b)(3) of the Employee Retirement Income Security Act of 1974 
(ERISA), which authorizes PBGC to issue regulations to carry out the 
purposes of title IV of ERISA, and section 4007 of ERISA, which gives 
PBGC authority to assess late payment penalties.

Major Provisions of the Regulatory Action

    The penalty for late payment of a premium is a percentage of the 
amount paid late multiplied by the number of full or partial months the 
amount is late, subject to a floor of $25 (or the amount of premium 
paid late, if less). There are two levels of penalty, which heretofore 
have been 1 percent per month (with a 50 percent cap) and 5 percent per 
month (capped at 100 percent). The lower rate applies to ``self-
correction''--that is, where the premium underpayment is corrected 
before PBGC gives notice that there is or may be an underpayment. This 
final rule cuts the rates and caps in half (to \1/2\ percent with a 25 
percent cap and 2\1/2\ percent with a 50 percent cap, respectively) and 
eliminates the floor.
    The rulemaking also creates a new penalty waiver that applies to 
underpayments by plans with good compliance histories if corrected 
promptly after notice from PBGC. PBGC will waive 80 percent of the 
penalty assessed for such a plan.

Background

    PBGC administers the pension plan termination insurance program 
under title IV of the Employee Retirement Income Security Act of 1974 
(ERISA). Under ERISA sections 4006 and 4007, plans covered by title IV 
must pay premiums to PBGC. PBGC's premium regulations--on Premium Rates 
(29 CFR part 4006) and on Payment of Premiums (29 CFR part 4007)--
implement ERISA sections 4006 and 4007.
    ERISA section 4007(b)(1) provides that if a premium is not paid 
when due, PBGC is authorized to assess a penalty up to 100 percent of 
the overdue amount. The statute does not condition exercise of this 
authority on a finding of

[[Page 65543]]

bad faith or lack of due care; it is solely based on the failure to 
pay.\1\ However, the fact that assessment is authorized (rather than 
mandated)--and thus that PBGC could choose not to exercise the 
authority at all--indicates that PBGC has the flexibility to assess 
less than the full amount of penalty authorized and to reduce or 
eliminate a penalty.\2\
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    \1\ The statute provides a waiver of penalty for 60 days if PBGC 
finds that timely payment would cause substantial hardship, but PBGC 
may not grant the waiver if it appears that the plan will be unable 
to pay the premium within 60 days. PBGC has found no record that 
such a waiver has ever been granted during the agency's 40+ years of 
existence.
    \2\ In contrast, the statute requires that interest on late 
premiums ``shall be paid'' at a specified rate for the overdue 
period.
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    PBGC has provided for the exercise of its authority to impose 
penalties in the premium payment regulation. Under Sec.  4007.8 of the 
regulation, late payment penalties accrue at the rate of 1 percent or 5 
percent per month (or portion of a month) of the unpaid amount, except 
that the smallest penalty assessed is the lesser of $25 or the amount 
of unpaid premium. Whether the 1-percent or 5-percent rate applies 
depends on whether the underpayment is ``self-corrected'' or not. Self-
correction refers to payment of the delinquent amount before PBGC gives 
written notice of a possible delinquency. One-percent penalties are 
capped by the regulation at 50 percent and 5-percent penalties at 100 
percent of the unpaid amount. Although penalties can be significant in 
some cases, they are generally assessed in amounts far less than the 
statutory maximum.
    This two-tiered structure provides an incentive to self-correct and 
reflects PBGC's judgment that those that come forward voluntarily to 
correct underpayments deserve more forbearance than those that PBGC 
identifies through its premium enforcement programs.
    The premium payment regulation and its appendix also authorize 
waivers of late premium payment penalties. For example, Sec.  4007.8(f) 
provides an automatic waiver for cases where premiums are not more than 
seven days late. The regulation and appendix also provide for waivers 
based on facts and circumstances and give detailed guidance about some 
specific grounds for waivers, such as where there is reasonable cause 
for the late payment.\3\ PBGC may also waive penalties where it finds 
that there are other appropriate circumstances.\4\
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    \3\ Section 22(a) of the appendix to the premium payment 
regulation says that there is reasonable cause for failure to pay a 
premium timely if the failure arises from circumstances beyond the 
payer's control and the payer could not avoid the failure by the 
exercise of ordinary business care and prudence. Examples are 
provided in sections 24 and 25 of the appendix: Sudden and 
unexpected absence of a responsible individual, loss of records in a 
casualty or disaster, erroneous PBGC advice, and inability to get 
necessary information.
    \4\ See section 21(b)(5) of the appendix to the premium payment 
regulation.
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    On April 28, 2016 (at 81 FR 25363), PBGC published a proposed rule 
to reduce penalty rates for late payment of annual (flat- and variable-
rate) premiums and create a new automatic waiver of 80 percent of 
penalties at the higher rate for plans that demonstrate good 
compliance.\5\ PBGC sought public comment on its proposal. Four 
comments were received. Three commenters supported the proposal. The 
other commenter expressed opposition, citing the importance of plan 
funding and payment of premiums. PBGC believes, as discussed below, 
that the reduction of premium late-payment penalties it is implementing 
will not adversely affect premium payments; and by reducing the cost of 
maintaining a plan, the penalty reduction appears more likely to 
improve than impair plan funding.
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    \5\ The proposal would not affect penalties for late payment of 
the termination premium under Sec.  4007.13 of the premium payment 
regulation.
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    One commenter that supported the proposal urged PBGC to go further 
and apply the new penalty rules to all unresolved premium penalty 
cases. PBGC is adhering to its proposal to apply the new rules to 
premiums for plan years beginning after 2015. Future applicability is a 
reasonable approach for all kinds of new rules, whether more lenient 
(as here) or stricter. And to apply the new rules to some but not all 
late premium payments for pre-2016 years could be seen as an 
inequitable approach. A plan that corrected promptly--and whose case 
was therefore closed--would not get the benefit of the new, lower 
penalties; whereas one that delayed would be subject to lower penalties 
if its case was still open.
    However, PBGC has concluded that--in pending requests for 
reconsideration for pre-2016 years--it is appropriate to use its pre-
existing discretionary authority to take account of good compliance and 
prompt correction, among other facts and circumstances. While such 
exercises of discretion cannot be expected to turn on the same factual 
analysis or provide the same result as this final rule, they represent 
a similar quality of consideration as that provision.
    The same commenter also urged PBGC to consider similar relief on a 
case-by-case basis for cases that have already been resolved under pre-
amendment rules. The comment focused particularly on penalties that 
were large and ``disproportionate'' (under the circumstances) and arose 
from ``inadvertence.'' PBGC is not persuaded to take this course.
    Because larger penalties correlate with larger premiums, larger 
plans, and larger employers, relief focused on larger penalties would 
be focused away from smaller plans and employers--at odds with PBGC's 
goal of reducing burden for small entities. And since virtually every 
failure to pay premiums timely is inadvertent, inadvertence is neither 
a useful nor an appropriate criterion for granting penalty relief. 
Further, ``disproportionality'' is a subtle and subjective standard 
that could take time to apply consistently to a large number of cases. 
And significantly, the principle of finality is important in avoiding 
perpetual uncertainty about the outcomes of disputes. PBGC considers it 
inappropriate to reopen cases properly closed.

PBGC's Action

    PBGC is adopting the penalty relief it proposed but is clarifying 
the operation of the 80-percent waiver for compliant plans, as 
discussed below.

Reduced Penalty Rates

    Over the years--especially in recent years--Congress has 
significantly increased PBGC premium rates. Since late payment 
penalties are a percentage of unpaid premium, the penalties have gone 
up in proportion to the increase in premiums. While it is not unfair to 
impose larger penalties for late payment of larger amounts, PBGC is 
sensitive to the fact that a penalty assessed today may be several 
times what would have been assessed years ago for the same acts or 
omissions involving a plan with the same number of participants and the 
same unfunded vested benefits.
    PBGC has good reason to believe that smaller penalties will provide 
an adequate incentive for compliance by premium payers. PBGC's 
experience has been that compliance with the premium payment 
requirements is influenced primarily by the consistency of PBGC's 
penalty assessment activities, and only secondarily by the size of 
penalties assessed. PBGC observes that in most cases, a late payment is 
inadvertent and that assessment of a penalty sparks improvement of a 
plan's compliance systems whether the penalty is large or small. This 
experience supports the conclusion that if PBGC continues its current 
consistent enforcement efforts, assessing significantly lower penalties 
will yield a satisfactory level of compliance.

[[Page 65544]]

    Accordingly, PBGC is cutting penalty rates and caps in half, so 
that the lower (self-correction) rate will be \1/2\ percent with a 25 
percent cap, and the higher rate will be 2\1/2\ percent with a 50 
percent cap. PBGC is also eliminating the floor on penalty assessments, 
so that if the penalty assessment formula generates a penalty less than 
$25, it will not be automatically inflated to the floor amount.

Recognition of Good Premium Compliance

    Applying a lower penalty rate to self-correction recognizes that it 
is desirable for a plan to catch and fix its own mistakes, whatever its 
compliance history may be. PBGC has given this matter further thought 
and concluded that a demonstrated commitment to premium compliance is 
also worthy of recognition, even if a plan corrects an underpayment (of 
which it is likely unaware) only after notice from PBGC. PBGC believes 
such a commitment is evidenced where a plan has a history of consistent 
compliance and acts promptly to correct an underpayment when notified 
by PBGC. PBGC will therefore automatically waive 80 percent of 
penalties assessed at the higher (2\1/2\-percent) rate where the 
following two conditions are satisfied.
    The first condition is that the plan have a five-year record of 
premium compliance. Generally, this means timely payment of all 
premiums for the five plan years preceding the year of the delinquency, 
as shown by the plan's premium filings. However, a late payment will 
not count against a plan if PBGC did not require payment of a penalty, 
such as where there was a waiver of the entire penalty. A plan that was 
not in existence as a covered plan for the full five years will be 
judged on its coverage years.
    The second condition is prompt correction. Prompt correction, for 
this purpose, means that the premium shortfall for which a penalty is 
being assessed is made good no later than 30 days after PBGC notifies 
the plan in writing that there is or might be a problem. In other 
words, a plan that meets the first condition, and is assessed penalty 
at the 2\1/2\-percent rate, will qualify for an automatic 80-percent 
reduction if the premium shortfall is paid within 30 days.
    PBGC has made two clarifying changes to the proposed regulatory 
text describing the 80-percent waiver. The amount waived is now 
described as 80 percent of the amount ``assessed,'' rather than the 
amount ``otherwise applicable.'' And the amount that must have been 
paid by the end of the 30-day period is now described as the ``total 
amount of premium'' for the year, rather than the ``amount of unpaid 
premium.'' PBGC feels that the new formulations are clearer and more 
definite.

Effect of Changes

    PBGC typically discovers the most common premium payment errors 
fairly quickly--errors like failing to pay, sending payment that 
doesn't match the information filed, and so forth--and generally 
notifies plans of their delinquencies within a month or two after the 
due date. Thus, a plan that corrects an underpayment before or promptly 
after notice from PBGC typically owes no more than a few months' 
penalty.
    For example, if a plan paid a $1 million premium two months late 
(after notice from PBGC), the penalty under the regulation as it 
existed before this amendment would be $100,000 (two months times 5 
percent times $1 million). Under the revised regulation, the penalty 
would be $50,000 (two months times 2\1/2\ percent times $1 million). If 
the plan qualified for the compliant plan partial waiver, the penalty 
would be reduced by 80 percent, from $50,000 to $10,000.
    In a typical case, the changes in this final rule will in effect 
make the penalty rate for compliant plans the same as the ``self-
correction'' penalty rate. In clarification of the preamble to the 
proposed rule, however, this will not be true in the unusual case where 
a penalty cap comes into play. For while the penalty rates for self-
correctors and others are in the ratio of one to five, the caps are in 
the ratio of one to two.
    The effect of the changes is summarized in the following table on 
the assumption that the penalty caps do not come into play.

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                                                    Monthly penalty rate if shortfall is corrected--
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       Good compliance history?          At or before date of     Within 30 days after   More than 30 days after
                                             PBGC notice              PBGC notice              PBGC notice
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No...................................  \1/2\ percent..........  2\1/2\ percent.........  2\1/2\ percent.
Yes..................................  \1/2\ percent..........  \1/2\ percent (after     2\1/2\ percent.
                                                                 waiver).
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Compliance With Regulatory Requirements

Executive Orders 12866 and 13563

    PBGC has determined, in consultation with the Office of Management 
and Budget, that this final rule is not a ``significant regulatory 
action'' under Executive Order 12866.
    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility.
    PBGC does not expect this final rule to cause a significant change 
in premium compliance patterns. As noted above, PBGC's experience is 
that prompt assessment, rather than amount, is the key to using 
penalties as a compliance tool. A reduction in the penalty cost of late 
payment is unlikely to reduce the incidence of late payment, but is 
also unlikely to encourage late payment: no penalty is better than a 
low penalty. Thus, the primary effect of the rule will be to save money 
for delinquent plans and reduce PBGC's penalty receipts. But PBGC 
assesses penalties not to generate income but to encourage compliance 
and sanction non-compliance. If PBGC can achieve the same level of 
timely payment while assessing lower penalties, higher penalties are 
inappropriate. And lower penalties may tend to encourage the 
continuation and adoption of defined benefit plans, a favorable outcome 
for plan participants.
    PBGC estimates that this rule will reduce penalty assessments for 
late payment of premiums by $2 million per year.
    This final rule is associated with retrospective review and 
analysis in PBGC's Plan for Regulatory Review issued in accordance with 
Executive Order 13563.

Regulatory Flexibility Act

    The Regulatory Flexibility Act imposes certain requirements with

[[Page 65545]]

respect to rules that are subject to the notice and comment 
requirements of section 553(b) of the Administrative Procedure Act and 
that are likely to have a significant economic impact on a substantial 
number of small entities. Unless an agency determines that a final rule 
is not likely to have a significant economic impact on a substantial 
number of small entities, section 604 of the Regulatory Flexibility Act 
requires that the agency present a final regulatory flexibility 
analysis at the time of the publication of the final rule describing 
the impact of the rule on small entities and steps taken to minimize 
the impact. Small entities include small businesses, organizations and 
governmental jurisdictions.
    For purposes of the Regulatory Flexibility Act requirements with 
respect to this final rule, PBGC considers a small entity to be a plan 
with fewer than 100 participants. This is substantially the same 
criterion PBGC uses in other regulations \6\ and is consistent with 
certain requirements in title I of ERISA \7\ and the Internal Revenue 
Code,\8\ as well as the definition of a small entity that the 
Department of Labor (DOL) has used for purposes of the Regulatory 
Flexibility Act.\9\ Using this proposed definition, about 64 percent 
(16,700 of 26,100) of plans covered by title IV of ERISA in 2010 were 
small plans.\10\
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    \6\ See e.g., special rules for small plans under part 4007 
(Payment of Premiums).
    \7\ See, e.g., ERISA section 104(a)(2), which permits the 
Secretary of Labor to prescribe simplified annual reports for 
pension plans that cover fewer than 100 participants.
    \8\ See, e.g., Code section 430(g)(2)(B), which permits plans 
with 100 or fewer participants to use valuation dates other than the 
first day of the plan year.
    \9\ See, e.g., DOL's final rule on Prohibited Transaction 
Exemption Procedures, 76 FR 66637, 66644 (Oct. 27, 2011).
    \10\ See PBGC 2010 pension insurance data table S-31, http://www.pbgc.gov/Documents/pension-insurance-data-tables-2010.pdf.
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    Further, while some large employers may have small plans, in 
general most small plans are maintained by small employers. Thus, PBGC 
believes that assessing the impact of the final rule on small plans is 
an appropriate substitute for evaluating the effect on small entities. 
The definition of small entity considered appropriate for this purpose 
differs, however, from a definition of small business based on size 
standards promulgated by the Small Business Administration (13 CFR 
121.201) pursuant to the Small Business Act. PBGC therefore requested 
comments on the appropriateness of the size standard used in evaluating 
the impact of the proposed rule on small entities. PBGC received no 
comments on this point.
    PBGC certifies under section 605(b) of the Regulatory Flexibility 
Act (5 U.S.C. 601 et seq.) that the amendments in this rule would not 
have a significant economic impact on a substantial number of small 
entities. Accordingly, as provided in section 605 of the Regulatory 
Flexibility Act (5 U.S.C. 601 et seq.), sections 603 and 604 do not 
apply. This certification is based on the fact that small plans 
generally pay small premiums and thus small penalties for late payment 
of premiums. The average late premium penalty paid by a small plan for 
the 2014 plan year was about $160. This proposed rule would cut penalty 
payments in half, and thus create an average annual net economic 
benefit for each small plan of about $80. This is not a significant 
impact.

List of Subjects in 29 CFR Part 4007

    Employee benefit plans, Penalties, Pension insurance, Reporting and 
recordkeeping requirements.

    In consideration of the foregoing, PBGC amends 29 CFR part 4007 as 
follows:

PART 4007--PAYMENT OF PREMIUMS

0
 1. The authority citation for part 4007 continues to read as follows:

    Authority: 29 U.S.C. 1302(b)(3), 1303(A), 1306, 1307.


0
 2. In Sec.  4007.8:
0
 a. Paragraph (a) introductory text is amended by removing the words 
``paragraphs (b) through (g)'' and adding in their place the words 
``paragraphs (b) through (h)''; and by removing the words ``and is 
subject to a floor of $25 (or, if less, the amount of the unpaid 
premium)'';
0
 b. Paragraph (a)(1) is amended by removing the words ``a written 
notice'' and adding in their place the words ``the first written 
notice''; by removing the words ``1 percent'' and adding in their place 
the words ``\1/2\ percent''; and by removing the words ``50 percent'' 
and adding in their place the words ``25 percent''.
0
 c. Paragraph (a)(2) is amended by removing the words ``5 percent'' and 
adding in their place the words ``2\1/2\ percent''; and by removing the 
words ``100 percent'' and adding in their place the words ``50 
percent''.
0
 d. Paragraph (h) is added.
    The addition reads as follows:


Sec.  4007.8  Late payment penalty charges.

* * * * *
    (h) Demonstrated compliance. PBGC will waive 80 percent of the 
premium payment penalty assessed under paragraph (a)(2) of this section 
if the criteria in paragraphs (h)(1) and (2) of this section are met.
    (1) For each plan year within the last five plan years of coverage 
preceding the plan year for which the penalty rate is being 
determined,--
    (i) Any required premium filing for the plan has been made; and
    (ii) PBGC has not required payment of a penalty for the plan under 
this section.
    (2) For the plan year for which the penalty rate is being 
determined, the total amount of premium is paid no later than 30 days 
after PBGC issues the first written notice as described in paragraph 
(a)(1) of this section.

    Issued in Washington, DC, by
W. Thomas Reeder,
Director, Pension Benefit Guaranty Corporation.
[FR Doc. 2016-22901 Filed 9-22-16; 8:45 am]
 BILLING CODE 7709-02-P